The Brief History of Market Bubbles

Published: 2021-06-17 08:31:01
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In 1593 when the tulip was first brought to Holland, people must have never thought that this flower would one day set in such an extreme madness. At the peak when everyone was trying to obtain the tulip bulbs, the cost of a single Semper Augustus was said “to be enough to feed, clothe, and house a whole Dutch family for half a lifetime”. The sudden plunge in 1637 finally put an end to the passion of people over the tulip, which later on was also recorded as one of the earliest irrational asset bubbles.
Almost a century after that, the very first speculative bubbles on stock markets simultaneously happened in England and France, called the South Sea Bubble and the Mississippi Bubble, respectively. When the South Sea Company was newly established in 1711, its founders decided to take on a government debt of £10 million in exchange for the “monopoly over all trade to the South Sea”, successfully drove people to invest in its stock. The excitement wouldn’t have been so extreme had it not been for the rise of the French Mississippi Company stock that triggered the jingoism of the British. After the price climbed to £1000 per share in August 1720, a widespread sell-off kicked in and thus crashed down the once highly promising money-maker South Sea Company.Turning to the 20th century, another powerful stock market crash took place, resulting in the never-to-be-forgotten Great Depression. Within only eighteen months from March 1928 to September 1929, the US stock market had increased almost as much as it had been throughout the whole five-year period before that. The amount of money that was borrowed to buy stocks also went up by nine times larger, from $1 billion in 1921 to $9 billion in 1929. Later came the “Black Thursday” October 24 and the “Black Tuesday” October 29 that ignited the chain of panic selling, resulting in the leap of the unemployment rate at 25 percent and the ‘evaporation’ of more than 5,000 banks. Many other markets worldwide also corrupted, yet the crisis was still on its way.
Leaving the Western side, the Eastern world also had an infamous crash in the 1980s, which was fuelled by the country’s own monetary policy and affected both real estate and the stock market – Japan’s Bubble Economy. After the Plaza Accord being signed in 1985, the overseas investments became cheaper for Japanese companies and thus incentivized Bank of Japan to lower its interest rates. Both institutions and individuals increased their purchases of domestic stocks as well as urban land, which, as a consequence, pushed the stock index to 1.5 times larger than that of the US and the price of selling the Imperial Palace to enough for buying the whole California. By the end of 1989, the monetary policy was tightened, causing the bubble to pop and turning three-decade “Economic Miracle” to “Lost Decades”.
Although our daily life has become a lot easier and more convenient since the revolution of the technology, especially the appearance of the Internet, what the Internet companies brought to investors on the stock markets around the beginning of the 21st century was a different story. In 1994 when the Internet was made available to public, the number of its users kept on increasing and attracted the huge temptation towards this potential market, followed by the wave of newly established online companies and their IPOs. NASDAQ skyrocketed just in couple of years, reached to 5000 points in stock index at its peak with the price-earnings ratio of above 100. At the time, tech companies were said to be bid up to ridiculous P/E multiples, and becoming a millionaire was just a matter of 60 seconds in Silicon Valley. Not so long after that did the investors start to understand that there had been a speculative bubble going on, NASDAQ Composite lost 78% of its value falling from 5046.86 to 1114.11, bringing the Dot-com Bubble to an end.
Above is a brief overview of some well-known booms and busts on the markets throughout decades. From these, we can probably have a general idea that a bubble is probably to happen when market participants get overly enthusiastic about an asset and this enthusiasm spreads at such a speed of light that pushing the asset’s price to way above where it should be.

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